Closing the loop to build competitive advantage.

Table of Contents
Lean, is your Supply Chain really lean? .................................................................................................. 2 What happens when things go wrong? .................................................................................................. 3 Implications of Supply Chain Problems on Companies Stock Price ............................................................. 4 What can go wrong in the Supply Chain? .............................................................................................. 5 Build Collaborative Relationships ........................................................................................................... 5 Closing the loop to maximize benefits .................................................................................................... 8 Improving Visibility .............................................................................................................................. 8 Feeling the pulse of the business .......................................................................................................... 10 Understanding the eco-system ............................................................................................................. 11 Take the forecast, what forecast? ......................................................................................................... 12 Lets now close the loop ...................................................................................................................... 12 From Factory Automation to Supply Chain Management ........................................................................ 13 What Infrastructure do we need? ......................................................................................................... 14 Where to start? ................................................................................................................................. 15 Conclusion ........................................................................................................................................ 16

Closing the loop to build competitive advantage.

Christian Verstraete, Senior Director, MDI Solutions Most companies have lean, six sigma and other programs to improve their efficiency. Cost cutting exercises have become the norm since the start of the century. Unfortunately competition has done the same, and so being cost-effective is no longer a unique advantage/differentiator. In such an environment, what can companies do to build sustainable competitive advantage that will make them the darlings of the stock markets for the fore-seeable future? One way is to look at the end-to-end value chains of which the company is interlinked and see how the operation of those value chains could be improved. This paper focuses on providing ideas on how, what and where companies could look for improvement.

Lean, is your Supply Chain really lean?

As just mentioned, many companies have run lean programs. In doing so, they have been able to remove the waste in their business. They have managed to reduce costs and improve efficiencies. But how have they done that? In their latest book, The Second Century1, Holweg and Pil illustrate what has happened with a UK automotive OEM. By looking at the graph here under, you will surely agree that the OEM has done a very good job. The stock within the four walls of the company is at the minimum level and production smoothly flows through the different stages. But it seems like this has been obtained through pushing all inventories out to suppliers and distributors alike. So, if we now look at this from a supply chain perspective, the described value chain is not exactly lean. And somebody will have to pay for this extra inventory. Its the consumer, who often is quite cost conscious. So, if a competitor manages to get his value chain more under control, hence reduce his sales price, he may appeal more to that customer, leaving the company in a non competitive position.
120 100 80 60 40 20 0 Pre-Assembly WIP Raw Material Loading/Dispatch In-house parts Bought-in parts Finished parts Inbound transit On-site parts Outbound transit Assembly WIP Assembly WIP Distribution Customer Maximum Average Minimum

First-tier supplier

Vehicle Manufacturer

Distribution/Retail

This is just an example, but it demonstrates very well what has happened in many companies during the cost cutting exercises. Savings have been made at the cost of suppliers and distributors. Its been even so bad that in some industries suppliers have gone bankrupt; leaving OEMs high and dry. What have they gained in the process? The above example illustrates that operational efficiency is no longer sufficient. Companies require strategic effectiveness to maintain a true competitive advantage. We believe that, such competitiveness can only be gained from looking not only inside but also outside the company itself and include suppliers, partners, distributors and customers in a holistic view of the complete value chain. This is an inter-related, intertwined and complex eco-system, with one disruption having a ripple through effect on the rest of the ecosystem. To optimize this value chain and make it more reliable, companies relationships with their key partners have to change drastically. A collaborative, win-win attitude needs to prevail. Unfortunately, leaving the responsibility of setting-up those relationships to a procurement department that is measured on price reductions is probably not the right way to achieve the trust and collaboration required. We advocate the need for a drastic review
1

The Second Century, reconnecting customers and value chain through build-to-order, Matthias Holweg and Frits K. Pil, The MIT Press, 2004

of procurement approaches and the building of a collaborative sourcing mentality within the Supply Chain organizations. Its when something goes wrong that the true benefit of such shift in attitude can really been experienced.

What happens when things go wrong?

When in 20012 the Ford Landstar division was ready to launch a new model, the whole project nearly collapsed. Their sole supplier of chassis was nearly bankrupt and demanded 10s of millions of dollars to start production. Obviously no prior warning was given. So Ford was left with two options, either pay what can be called blackmail, or delay introduction to find another supplier, which was obviously not accepted by marketing. The resolution of the dispute was going to cost time and money. Could it have been avoided? Thats the real question. In November 20053 Microsofts Xbox 360 entered the market to take full advantage of the upcoming 2005 holiday business season. The objective was to sell 3 million consoles in the first 90 days of introduction. Many customers lined up to get their new Xbox 360. They were disappointed by Microsofts continued inability to fulfill existing customer demand. The inside story points to a newly designed storage and graphics memory chip as one of the culprits of the delay in supply. One of the two designated suppliers was experiencing difficulties making enough chips to satisfy the clock speed requirements of the Xbox 360. Their yields were too low. Could Microsoft have avoided this, knowing the memory chip market-place is extremely volatile? Airbus delayed the delivery of the first A380 three times for well publicized wiring issues. On October 3rd, 2006, Airbus describes the issue4. It is the production process, not the air-craft itself, which has a critical error. The problem has to do with the design of the electrical cable harnesses for the fore and aft fuselage. There were incompatibilities in the electronic design programs which were used to develop the cable harnesses and their layout. The cable harness installation kits for the front and rear fuselage could not therefore keep up with the rest of the aircraft and did not fit when they came to be installed. The factories in Germany and Spain had used an older, tried and tested version of the 3D design program, while France and the UK converted to the latest version during the development of the A380. This resulted in difficulties in transferring data from one system to the other and in loss of critical engineering notes. It is expected to represent an EBIT shortfall of 4.6BEuro for the years 2006-20105 and make 10000+ people redundant. Could this have been avoided? On November 2nd, 20056, UK retailer Primark lost half its stock for the holiday shopping season due to a fire at its major warehouses, operated by TNT. It is interesting to note that, more than 50% of UK businesses ceased trading within six months after a major fire. But this is not what happened to Primark. Within 3 days, TNT was able to resume warehousing operations. In the mean time Primark worked at bringing forward orders and TNT chartered a large aircraft to fly in 400 tons worth of foreign orders that would otherwise not have arrived in time7. It also shifted sourcing from China to Turkey and North Africa to keep up with the demand. Not only did Primark manage to stay in business, they demonstrated the resilience of their Supply Chain and the importance of partnership. In 2003, HP noticed a significant increase in the warranty costs related to one of their notebook models. As the repairs were made by third parties, HP had no visibility on what caused the problem. They loaded the warranty records into Excel and painfully started analyzing what was going wrong. After several weeks, they discovered a strange coincidence. Every time the hard disk was replaced, the keyboard also got changed. This got them to go out and interview repair engineers to discover that the engineering manual did not clearly describe how to remove the keyboard to access the hard disk. As those engineers only had little time to fix the notebooks, a screwdriver often replaced the patience required to under-stand how to remove the keyboard. Obviously, the engineering manuals
2 3 4 5 6 7

Source: Supply Chain Digest Source: Xbox 360 Product Launch Issues, Robert Ferrari, February 2006 Source: A380 cable problems threaten Airbus, Sebastian Steinke, FlugRevue, December 2006 Source: EADS and Airbus finalize A380 review, EADS website, October 9, 2006 Source: Rising from the Ashes: Supply Chain Disaster Recovery Lessons from Primark, Guy Dunkerley, November 29th, 2005, AMRResearch Source: UK: Primark flies in garments for Christmas, December 7th, 2005, just-style.com

got immediately updated, but HP also put in place software to analyze all warranty records looking for trends and spot problems. This software has allowed them to reduce their warranty expenditures over the last couple years drastically. These examples not only show us that things can go wrong in supply chains, but also that the speed at which companies react and how they react differs greatly. And this has a direct impact on the stock price. As CEOs are increasingly judged on how well they grow the return to the share holders, they should take a hard look at their Supply Chain Operations to ensure surprises are avoided on the one hand and to improve key ratios like return on asset and inventory turns, as these are closely scrutinized by the stock markets.

Implications of Supply Chain Problems on Companies Stock Price

In 2000 Professor Vinod Singhai from Georgia Tech calculated the effect of disruptions on companies stock and came up with the results shown in the diagram attached. On average, supply chain problems result in an 8.6% reduction in market valuation. Interestingly enough, parts shortage has a lesser impact than development problems and quality issues. This is most probably due to the believe that alternate suppliers can be found quickly, while development problems and quality issues require an in depth analysis of the root cause before a solution can be found.
Percent
0 -2 -4 -6 -8 -10 -12 -14 Parts Shortage Production Problems Customer Changes Development Problems Ramp/Roll-Out Problems Quality Problems

In an article dated from 2005, Yossi Sheffi and James Rice from MIT describe the evolution of performance over time, pointing out that the implications are not felt immediately, but that it takes some time before the full impact of disruptions can be assessed. The long term impact can only be assessed much later in the process as recovery is typically slow.
First Response

Performance

Initial Impact Preparation

Long Term Impact

Preparation for Recovery Recovery

Disruptive Event

Time of Full Impact

Time

Source: Yossi Sheffi & James B. Rice Jr., MIT SLOAN MANAGEMENT REzVIEW, 2005

With this in mind, companies should really ask themselves what they can do to plan for disruptions ahead of time and how they can avoid the publicity that typically goes with the announcement of problems.

What can go wrong in the Supply Chain?

We typically recognize six classes of disruptions that can affect the supply chain. These include: Market related events such as sudden changes in customer demand, the arrival of a new competitor, the opening up of new markets and the launch of a new substitute. Supply Chain related events such as shortage of material, supplier problems and capacity issues Product related events such as quality problems, functional and safety issues Political and Regulation related events such as geopolitical unrest, increased security in transportation, custom delays and new compliance rules. Environmental related events such as prospects for a pandemic and natural disasters Technology related events such as the introduction of a new technology, and counterfeiting The effects of some of those disruptions can be addressed by working closely with sup-pliers as seen in the example of Primark, described earlier. In this case the relationship is more a partnership than a supplier. In working with TNT, their service provider, and with their suppliers, they managed to keep operations going and provide their customers with most of the products they were looking for, during the critical Christmas period. But on the other hand, it is impossible to predict a tsunami or an earthquake. And these are typically so devastating that the supplier may no longer be operational. So, here proper risk management is required. By defining, ahead of time, what to do in particular scenarios one is ready if something similar happens. This is what scenario planning is all about. It was originally developed at Shell8 and gained wide acceptance in the industry. As many documents have been written on the subject of scenario planning, lets focus here on the partner relationships aspect.

Build Collaborative Relationships

The Primark case showed us how collaboration with Supply Chain partners actually resulted in reducing the recovery time and the magnitude and impact of the disruption drastically. What does this mean for the relationships with suppliers and services partners? Should we take a collaborative approach all along? Are all partners equivalent? The answer is actually no. Not all partners are equivalent. Knowing that building up a collaborative relationship takes time and effort, it is really important for a company to identify which partners are critical to the operation of the Supply Chain. Actually, by combining the understanding of the partners that provide differentiation in the product and the ones critical for the operation of the supply chain, the candidates for a collaborative approach are identified. Lets look at a simple model to identify the partners with whom to have a collaborative approach and the ones that can continue to be addressed in the confrontational mode. First, lets identify the suppliers whose components, ingredients and/or services allow us to clearly differentiate our end products. Obviously, as our product mix changes, they may no longer be critical, but it is important to do this exercise at a moment in time, taking the current situation into account. Lets now do the same for the supply chain operations. Which partners are critical to keep the supply chain going? Some partners may be important both from a product and supply chain perspective, while others, only from one of the two. So we can now position the partners in the square of the chart. In the example of Primark, TNT would definitely be at the top left. For Amazon, FedEx would probably be at the top right, as the Amazon product, e.g. the purchasing of a book on-line, includes

To gain insight into Scenario Planning at

http://en.wikipedia.org/wiki/Scenario_planning

not just the book, but also its delivery service. Its part of what differentiates Amazon from the brick and mortar bookstores. In the Ford case, their chassis supplier would be at the bottom right, as it definitely differentiates the car, but does nothing for the supply chain. The bolt and nut supplier from Ford is at the bottom left.
Critical

Process Based

Collaboration

Replaceable

As we already mentioned, collaboration takes organizational commitment, dedication, focus, and time and effort. So we should really start at the top right, starting with the partners that have most impact on both the product and the supply chain. If you have been dealing with such partners for years in a rather confrontational approach, you will have to man-age the change and build trust in the relationship. It is not the objective of this paper to discuss those elements in details, but it is important to take that into account when starting on the journey. You can ask yourself if the return is worth the effort, particularly if you believe the chances of being hit by a disruption is rather small. In an article9, Billington, Cordon and Vollman provide an interesting illustration. They looked at how Honda North America man-aged to reduce the cost of supplier provided parts way more than their US competitors, and the cumulative price index through strong collaboration with those partners. They have nurtured long term relationships with key suppliers, developing joint respect and admiration. Those relationships are based on shared trust, honesty, integrity and objective focus on results. To achieve that, Honda did not hesitate to send its engineers to its suppliers factories, helping them improve productivity, quality and synchronize production with their own. Through building such long term relationships, Honda reduced the risk for the key suppliers drastically, making them more willing to open up their facilities and looking at benefits for both parties. It also made the supplier more willing to work closely with Honda in case of a major disruption. This is where collaborative relationships pay back for all parties involved. This is a different way of working, one unnatural for western organizations. Many organizational barriers will have to be overcome before a company is ready to build such collaborative relationships. Resistance to change is probably the biggest.

Developing the Super Supplier, Corey Billington, Carlos Cordon and Tom Vollman, CPO Agenda, Spring 2006

Supply Chain Operations Confrontation

Replaceable

Product Related
Critical

Product Differentiation

How Collaboration helped Honda

20 15 Change in cost of all produced part 10 5 0 -5 -10 -15 -20 -25 0 1992 2 0.7 1993 5 3.3 -0.2 1994 1995 -3.1 1996 -7.9 1997 1998 7 9 7.56 11 7.56 7.1 14

Consumer Price Index Competitor Honda North America

-16 -19

Now, once the decision has been taken to become more collaborative, three barriers in building such relationships need to be addressed10. The cultural barrier. In an increasingly global environment, cultural differences often result in misunderstanding, lack of trust and adversity. When referring to culture, one should not limit this to the geographical cultural differences, but also include the corporate cultures. General Electric for example has a very different attitude towards suppliers than Cisco. The Risk barrier. The fear of relying on a supplier is often deeply engrained in organizations and requires extensive change management to be overturned. Will the supplier be able to help us in case of changes in the economical environment? Is the supplier performance going to be constant? If we share information with a supplier, will that information be safe? If we share IP with our supplier, will he not try to steal it from us? These are the various questions that need to be answered by the organization. Hence the importance of strong sponsorship from the top of the organization to overcome the organizational resistance. The Trust barrier. Trust typically starts with a couple individuals in both companies. They create a personal trust that initiates the transformation of the relationship. The danger is to stay at that level and count on those individuals to keep the relationship going. As soon as the individuals move to other duties, the relationship falters. It is critical to transform the personal relationship into an executive one as soon as possible by creating interactions at multiple levels in the organizations and building escalation routes in case of problems. By removing the dependency of the relationship from specific individuals, not only does one build a stronger one, but also a long lasting one. By building escalation routes, problems that cannot be addressed by the prime contacts can be taken up the organization and resolved at a higher level as the links between the organizations exist. Addressing these barriers with a partner transforms the relationship into a collaborative one, forcing the partners to work more closely together, exercise the trust and accept the risk. Keeping this relationship alive is form of continuous improvement as experiencing the partnership makes it stronger. Examples of long term partnerships exists in all industries, let me just highlight the Canon-HP relationship for laser printers that is in place for nearly twenty years now and has benefited both companies greatly. Building trust is a never ending story. Many relationships go down because of complacency and routine. It is important to keep the relationship going, to ensure it is top of mind in both organizations. Regular communication and celebrating success jointly is a good way to keep the momentum going. Having relationship advocates in both companies is really worth the investment as it helps keeping the momentum going.

10

Breaking through the barriers, Michel Philipart, Christian Verstraete and Serge Wynen, CPO Agenda, Spring 2006

You may believe that reducing costs is more important than building up such relation-ships as you do not see the short term benefits you will gain from the latter. In that case, the story that happened to Ford recently may have you thinking11. In late 2006, Ford decided it would use Navistars new 6.4 liter engine in its Super Duty F-250 and F-350 Pick-Up range as of January 2007. Navistar quoted a price of $7.600 per engine, which was completely unacceptable in Fords eyes. Ford thought a price of $6.100 was closer to what they were pre-pared to pay. Ford also claimed the previous model had such problems that Navistar ought to pay some $1 billion to help defray repair costs that Ford bore under warranties. In mid-January, Ford began debiting Navistars account by tens of millions of dollars and filed suit. This resulted in a blunt letter from the parts supplier. Ford was demanding that Navistar sell engines at a loss to accommodate Fords desire for higher profits. Navistar was ready to fire its biggest customer. Four days later, on February 23rd, Navistar stopped shipping diesel engines to Ford. Ford obtained a temporary restraining order, and on March 9th agreed to reimburse Navistar for part of the debited funds and to pay Navistars asking price until Michigan state-court litigation between the two is settled. Many automotive suppliers are now ahead of the U.S. car companies in going through painful restructuring. Some of them have been taken over by private equity investors who do no longer accept money losing contracts for the sake of keeping up relationships and volumes. The example of the auto industry is dramatic and is front-page news. But this is not the only place where it happens. Isnt it easier to slowly build collaborative relationships with partners before being forced to do so by defiant suppliers?

Closing the loop to maximize benefits

Now, how do we maximize the benefits of integrating the end-to-end supply chain and ensure lasting success working closely and consistently with our partners? If we look at the key issues CEOs and CFOs are looking at we find following topics: Reduce the capital asset stuck in the end-to-end supply chain Become more agile and responsive to market demand Manage the risk inherent to a global value chain They dont want to be on the front pages due to Supply Chain related issues, risking their stock price going down X% as we pointed out earlier. So they are looking at how they can address the issues in time despite lower stock. We believe that the issues described above, and illustrated in the earlier examples, can be addressed by improving the visibility in the value chain, managing demand and supply better, and developing an organization capable of reacting quickly to external events. Lets describe how, by combining people, processes and infrastructures, one can address each of these three elements.

Improving Visibility
When companies had all steps of the manufacturing and distribution of their products under control, they were able to have full visibility of what was happening. In outsourcing activities, through the buying of more sophisticated components or ingredients, the out-sourcing of manufacturing and logistics, and relying on distribution networks for reaching the consumer, companies have lost that visibility as an ever increasing amount of added value was performed by others. The Center for Automotive Research expects the OEM share of value added in the car industry to be between 28 and 33% by 201012. This means that nearly 70% of the value is created by other companies that are not under direct responsibility of the OEMs. To regain control, those OEMs need to obtain an exact understanding of what happens in those companies. But obviously, the latter are not interested in sharing in-formation on their processes and activities as they fear the OEMs will use that information against them in the next price negotiation round. This brings us back to the earlier part of this
11 12

New Detroit Woe: Makers of parts wont cut prices. Jeffrey McCracken and Paul Glader, The Wall Street Journal, Tuesday, march 20th, 2007 Estimating the New Automotive Value Chain, CAR, 2002

document. Gaining visibility will require a different relationship within the value chain to ensure a proper transfer of information. And this is precisely what the OEM will have to do to maintain a sustainable differentiation in the marketplace. To manage and optimize a value chain, four classes of information need to be gathered. These consist in Supply, Cost, Inventory and Demand (SCID) information: Supply information includes order status and progress, capacity, shipments and receipts amongst others Cost information includes manufacturing, logistics and warehousing costs amongst others Inventory information contains the inventory levels of key components and finished products Demand information contains orders placed, forecast, demand patterns and promotions amongst others The SCID information elements are provided by the companies own systems, through the execution of transactions with suppliers or distributors and through the transmission of information by those partners. To obtain valuable information, trust is required between the partners as we described earlier in the document. A secure infrastructure needs to be put in place to allow the partners to collaborate, execute transactions and share information while being assured that their competitors do not have access to any such element. Standardizing the data that is transferred over this infrastructure is mandatory to ensure the data is under-stood in the same way by all partners. Standards such as EDI, RosettaNet, eb-XML and others have been established for such purpose. Technologies such as RFID can play an important role in improving visibility as they provide an automated way to track the progress of material through the end-to-end supply chain. They provide increased accuracy of inventory and allow tracking particular batches of products if and when required. Locator based technologies would even allow to follow products during transfer by logistics partners, gaining an ever better understanding of how the supply chain actually operates. As RFID forces companies to build closer ties, it is an excellent tool to initiate the change we talked about earlier.
Information Material Finance Demand, orders, quality, feedback Returns, repairs, servicing, recycling, disposal Payments

Demand
Capacity, delivery schedules Supply, intermediate products, finished products Credits, payment terms, invoices

Supply
Information Material Finance

Locator based technologies would even allow to follow products during transfer by logistics partners, gaining an ever better understanding of how the supply chain actually operates. As RFID forces companies to build closer ties, it is an excellent tool to initiate the change we talked about earlier. The SCID information does serve to manage the value chain on a day to day basis and ensure orders are delivered on time, but is also the basis to identify how the value chain evolves over time and can be improved.

Feeling the pulse of the business

A number of years ago I read the story of a candy store owner. He typically used students to serve his customers while he was in the back room, managing his stock, placing orders and tracking deliveries. Every time a purchase was made, he could hear the sound of the cash drawer opening. When the interval between two sounds increased, he checked his inventory, took a blackboard, walked out of the back room, wrote down a promotion and set up the board in front of his shop. From the back room he could very quickly judge the results of his proposal listening to the sound of the cash register. This is how he kept the pulse of the business. Collecting the SCID information throughout the eco-system and visualizing that information puts a company in the same situation as the candy store owner. It provides first an understanding what is happening at any given moment in time throughout the supply chain, but it also provides information on what can be done to react to changes. About 20 years ago, when working on a Computer Integrated Manufacturing project, the Manufacturing Director told me he wanted to have a smiley, one of those little yellow faces, on his screen when everything was working satisfactory, but as soon as something was going wrong, he wanted the appropriate information displayed. In the current information over-flow, it is important to detect problems quickly and display the relevant information for decision making purpose. The objective is not just to provide data for the sake of data, but actually to clearly identify what information is getting off track. The picture shown here is an illustration of how this can be done. On the left, you have a map representing in this case the distribution centers. In red are highlighted the ones where inventory problems appear. In this particular case, this can be shortage or pile ups. By clicking on the depot, or by using the hyperlinks at the bottom right, the user can zoom into the data and understand what products are affected, how the stock evolves over time (based on the forecasted demand), and when new deliveries are planned. By doing so, the user is provided with the information he needs to decide whether to intervene or not. We do not advocate automatic intervention, as supply chains are typically rather complex and it is not always easy to grasp all the implications of a situation, but rather to give the user all the visibility he requires to take a clear decision. At the top right you will find a more traditional dashboard, showing the current status of a number of key performance indicators for the distribution centers. This is just an example of how the SCID data may be used to follow the operations in real-time.

By visualizing both the demand signal (how much is sold at any given moment in time) and the supply signal (how much is available in the eco-system), shortages and stock pile-up become very quickly apparent. Its interesting to see that CPG companies often receive the demand signal from Retailers through POS (Point-of-Sales) data, but that many of them do not exploit the information due to the lack of appropriate business intelligence and decision support systems.

Understanding the eco-system

In the previous section we focused on the real-time data. However, there is one dimension that the above approach does not take into account, and this is the time dimension. To run the operations smoothly it is important to know what happens at any moment in time. To optimize these operations, one need to understand how things evolve over time, how the system reacts to external events and where the weak points are. The event management function highlights when things go wrong. But in many cases, is-sues can be seen coming. Through analyzing the evolution of key performance indicators over time, one can for example, spot trends that go in the wrong direction. Let me give an example. Lets assume a company has agreed a 98% perfect order fulfillment13 rate (POFR) with its supplier. If the POFR gets under 98%, the event management system will highlight the problem and it will be up to the company and its supplier to understand what happens. However, this degradation of services may have implications downstream. Now, if the POFR slowly degrades due to lack of attention for example, one could spot the trend much earlier by looking at the KPI over time, and one could get back to the supplier and draw his attention to this fact before the 98% mark is reached and downstream is affected. This is where the historical information really plays a role. This makes the supply chain more robust and reliant. Operational systems provide you with a snapshot vision of the situation which allows you to take decisions related to a binary fact; the information is good or bad. Looking at the evolution of key data points over time allows you to look at trends and extrapolate in what direction things are going. This is very powerful. Let me give you another example. This one is related to safety stocks. We all know how safety stock levels are identified. The event view of things is that there is enough or not enough stock in function of the level defined. The historical view allows you to evaluate how the stock level has evolved over a period of time and identify whether the defined safety stock level is too low or too high, ultimately allowing you to set the right stock level and immobilize only the required capital assets. The screen shot shown here demonstrates how one can easily display trends and under-stand the evolution of KPIs over time. By digging into the information, once an anomaly has been found, one can really understand what happens and take appropriate action. Here again, the objective of the approach is not to have an automatic system, but rather to spot what is going well and what is not.

13

The SCOR 8.0 model defines Perfect order Fulfillment as: The percentage of orders meeting delivery performance with complete and accurate documentation and no delivery damage. Components include all items and quantities on-time using the customers definition of on-time, and documentation - packing slips, bills of lading, invoices, etc.

Gaining such understanding is critical. A couple of years ago, the Personal Systems Group of HP reviewed the true cost of their inventory in their supply chain, taking into ac-count not just warehouse management and capital costs, but also including costs related to the lifecycle of the product (such as devaluation and obsolescence), to leakage, to returns and discounts etc. These analyses made them change the design of the supply chain drastically, resulting in substantial benefits14 for the company.

Take the forecast, what forecast?

There is only one thing everybody agrees on, when speaking about forecast, and that is that they are always wrong. Its often a heated discussion between the sales and the supply chain teams. The first question to ask ourselves is how forecasts are generated. In most situations, the initial forecast is generated by the sales teams that are directly in contact with the market. But as those forecasts travel through the organization, they are tuned and tweaked at every level as forecast accuracy is one of the measures of most managers. By the time these forecasts reach the supply chain and manufacturing teams they are so remote from the original signals that the divisions decide to ignore them and come up with their own. So, what have we gained? If we go back to the example I gave earlier about the candy store, I would argue we would be better off with a demand signal that comes directly from the market. By combining the actual sales with the forecast from the sales teams, one obtains a demand signal that is as good as any other. Actually, I would argue that it is even better because it is in direct touch with the market. By monitoring those demand signals over time, one could obtain a pattern of deviation versus actual and over time understand how to correct the signal to be closer to reality. This is obviously a long term activity that requires appropriate data collection and close analysis. To achieve this, one needs to remove forecast accuracy from the management scorecard though, otherwise they will want to have their inputs, and, as we saw it before, distort the signal.

Lets now close the loop

If we combine the demand signal with the actual status of the supply chain, one can now close the loop. To represent this, lets go back to control theory and represent the different components we described up till now in one graph. In the figure below, we are representing the demand signal on the left. This signal is the combination of the actual demand for future delivery, combined with the forecasts from the sales teams, potentially corrected for deviation, seasonality, competitive moves and unpredicted events. This demand signal is entered in the planning algorithm as the demand. On the other end, the actual status of the supply chain is provided by the supply chain management environment. That one knows the inventory levels at each stage in the process for example. The planning algorithm will calculate the actual plan that needs to be injected in the collaborative value chain or eco-system. Theoretically the supply chain will supply the amount of finished products required by the plan. So, within the constraints of the supply chain, the demand signal will be met.

14

For more on this subject, please refer to: Inventory Driven Costs, by Gianpaolo Callioni, Xavier de Montgros, Regine Slagmulder, Luk N. van Wassenhove and Lind Wright, Harvard Business Review March 2005

Supply Chain Optimization

Historical Data

Demand Requirement
Demand Time

Supply Requirement
Supply

Planning

Value Chain Collaboration

Time

Competition Regulations Unpredictable Events Operational Data Value Chain Visibility

Unfortunately, we all know that things do not always go right and that problems may happen. These issues will be spotted by the supply chain visibility system, and appropriate action can then be taken. I would actually argue that one of the actions that could be taken is to re-plan with the new situation in mind. This would have as effect to identify early on how the problem affects the supply chain, and allow early warning of the customers that may suffer from the situation. In many cases, making customers aware of delivery problems early allows them to re-plan their own operations and as such limit the damage. This is really the primary control loop of the supply chain system. On the other hand, as we stated above, by using the time dimension, one can optimize the supply chain. This optimization process may result in altering the supply chain and/or the planning algorithms to ensure a smoother operation of the system. This is the supervisory control loop.

From Factory Automation to Supply Chain Management

Nearly 20 years ago I was involved in the development of a Computer Integrated Manufacturing project for a Consumer Packaged Goods company. We broke new ground by linking the MRP, the Production Scheduling and the MES15 system and triggering a rescheduling as soon as one of the production lines had to be stopped for more than 5 minutes. We moved from a time based scheduling to a combination of time and event based scheduling. In doing so we increased the responsiveness of the factory drastically while ensuring a higher utilization and better customer satisfaction. Why? Actually for a very simple reason, as soon as one asset became unavailable, we used the scheduling package to recalculate how we could manufacture the items with the shortest lead time on the equipment that remained available, ensuring in time delivery of orders to a maximum of customers.
Orders, Inventory Levels

ERP
Company information eg. Inventory levels, Orders,

Planning
Plans

Inventory Levels, Capacities

Visibility

Collaboration

Re-planning Triggers

15

MES stands for Manufacturing Execution System, the interface between the factory automation equipment and the operational systems

Now, 20 years later, we should use the same philosophy, no longer on the factory floor, but at supply chain level. MRP has been replaced by ERP obviously and production scheduling by SNP. We need a supply chain equivalent of MES. Well I would advocate that Supply Chain Visibility actually performs this function. So, by integrating the three systems and by using SCV to identify when to re-trigger the planning function, we can gain similar results from a Supply Chain perspective. This is what we are calling, closing the loop.

What Infrastructure do we need?

The infrastructure underlying such Supply Chain Visibility environment is actually threefold as described in this figure. First, the data needs to be gathered from a variety of systems. These include the companies own operational systems such as ERP and planning, as well as information coming from suppliers and other supply chain partners alike. That information can come through a variety of ways. Companies may use EDI, RosettaNet, eb-XML or a variety of other transaction standards to execute collaborative transactions. Alternatively partners may enter data in private websites. The latter option is often used for smaller partners that are not equipped yet for collaborative transactions. The transfer of the data needs to happen in a secure way, ensuring the information is received once and only once. Todays EAI (Enterprise Application Integration) technologies provide appropriate capabilities to ad-dress these issues. Also, as often partners compete for the same business in the supply chain or elsewhere, access to the Collaboration Business Infrastructure (CBI) needs to be secure. Another important function performed by CBI is the translation of the data to a consistent and understandable format. Let me take a simple example. If a supplier is providing me de-livery information in pallets, but Im used to look at that information by case, it is important that any data coming from that particular supplier is transformed from number of pallets to number of cases. This sounds obvious, but is often forgotten.

Once the data has been received, its kept in the operational data store (ODS). The purpose of this data store is to maintain a maximum of data regarding whats happening now. Its the operational data store that allows you to take the pulse of the data as we called it earlier. Using reporting and event management tools, potential issues can be spotted. These will serve as a trigger to warn customers, re-plan the supply chain or take any other appropriate decision. Information will be kept in the operational data store for a period of time relevant to the business. Typically this will be the order to delivery lead time augmented with a reasonable amount of time for the customer to use the product and find out potential issues. Once that period is over, the data is consolidated and transferred to the business warehouse. Here is where the time dimension is added. By using appropriate analysis and reporting tools, one can now understand and optimize the eco-system.

Masters
Organization Supplier Customer Material

Procurement Inventory

Sales Planning

Shipment Manufacturing

Both the operational data store and the business warehouse maintain a series of data-sets containing the information depicted in this figure. The masters data set is the embryo of the Master Data Management (MDM) function that will have to appear at supply chain level. Unfortunately, as most companies have not yet fixed their own MDM function yet, having this done at eco-system level is an illusion. This is the reason why we maintain such data in the Supply Chain Visibility infrastructure itself, realizing that the data maintained here may be in a different form than the one of each of the enterprises included in the eco-system.

Where to start?
This paper describes a drastic change in the way companies look at their value chains. This is not something that can be implemented in a short period of time. Relationships with partners have to be improved, the organization has to be incented to working in a more collaborative approach and an infrastructure supporting the transfer of information across the supply chain has to be implemented. The first steps along this road are the most difficult one. This is the reason why we suggest starting with an assessment of the maturity of the supply chain, identifying the key partners, understanding the status of the relationships and identifying where to begin. In a second step, the collaborative business processes should clearly be defined and agreed upon with the initial partners. This will also include the identification of the data-items that are transferred to improve the visibility. Then it becomes time to perform a proof of concept in the visibility & collaboration space to allow the partners to experience the change and understand the benefits of this new approach. It also allows the development of intuitive dashboards, reports and analysis approaches. As the scope is initially small, experimentation is easy and improvements are fast to implement From then on, new partners, new collaboration processes and new data items are added to the environment. Once enough information is available in the operational data store we talked about earlier, it becomes time to close the loop. Thats where the re-planning processes are implemented. In parallel with the above, strong management of change is required. Such approach can only be established with strong top management commitment. If the employees and partners alike do not feel the drive and ownership they will go back to their traditional operating procedures and attitudes. This looks like costly, time consuming and slow. So, you may want to ask yourself why to do it. I shared with you some stories of how things can go wrong early in this document. Let me finish off with one showing how collaborative relationships can save the game in extreme cases. On Saturday, February 1st, 1997, a fire roared through Aisin Seiki Co.s Factory No. 116, leveling the huge autoparts plant. This fire incinerated the main source of a crucial brake valve that Toyota uses in most of its cars. Although the valve only costs 5$, Toyota only holds a four-hour supply. As a result they had to shut down its 20 auto plants in Japan, who build 14,000 cars a day. Some experts believed it would take Toyota weeks before they would be able to restart those factories, but five days after the
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Source: Toyota Motor Shows Its Mettle after Fire Destroys Parts Plant, Wall Street Journal, May 8th, 1997 by Valerie Reitman

fire, cars started rolling out of the plants again. What had happened? Toyota suppliers and local companies rushed to the rescue. Within hours they had begun taking blueprints of the valve, improvising tooling systems and setting up makeshift production lines. By the following Thursday, the 36 suppliers, aided by more than 150 subcontractors, had nearly 50 separate production lines making small batches of the brake valve. And they were being delivered to the Toyota plants right on time to re-start operations on Friday. This was orchestrated with very limited direct control from Toyota and with no haggling over technical proprietary rights or financial compensation according to an article in Sloan Management Review17. Was it worth for Toyota to build the collaborative relationships? All in all, Toyota lost the production of 72,000 vehicles, but its value chain was strengthened by the experience, preparing it to become the largest automaker in the world. Interestingly to note is the fact that on NYSE, Toyotas stock dropped from 51.24$ to 49.5$, just after the fire, but that it was up again at 54.96$ by February 13th. By no way was Toyotas market valuation penalized by the Supply Chain problem.

Conclusion
Several years ago, I had dinner with a head of procurement. During the discussion he mentioned that the implementation of a single ERP system killed the understanding of the dynamics of the enterprise and its supply chain. I have to admit I was rather taken aback by the comment, so I asked him to elaborate. He pointed out that the ERP database only al-lowed storing one value for each data-item, resulting in the loss of the evolution of that data-item and the understanding of the magnitude of the change possible for that data-item. The statement left me perplexed at that moment in time, but I have to admit it stayed somewhere hidden in my brain. Today I perfectly understand what he meant. As we have seen, adding the time dimension allows the understanding of how a piece of information evolves over time. This in turn gives the user the opportunity to optimize the eco-system to ensure an optimal use of the supply chain with minimal risk. And that is what he was after. This is more like an aircraft built with lots of interdependent subsystems to form a broad ecosystem. Yet they all work in tandem to make the aircraft fly from one destination to an-other. Similarly, the supply chain ecosystem is balanced and blended right from corporate culture to technology infrastructure and everything in between to make it work at all levels with the objective to deliver on time and every time. Closing the loop improves the day to day operations of the Supply Chain by reducing the time needed to react to an event or a trend, which in turn makes the value chain more robust and resilient. This really helps companies regain a competitive advantage and serve their customers better. It allows companies to understand the inventories really needed in their Supply Chains, reducing the capital asset immobilized while managing the risk inherent to running a global value chain.
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The Toyota Group and the Aisin Fire, by Toshihiro Nighiguchi and Alexandre Beaudet, Sloan Management Review vol 40, Fall 98, p 49-50

2007 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice. The only warranties for HP products and services are set forth in the express warranty statements accompanying such products and services. Nothing herein should be construed as constituting an additional warranty. HP shall not be liable for technical or editorial errors or omissions contained herein. Itanium is a trademark or registered trademark of Intel Corporation or its subsidiaries in the United States and other countries. July 2007